Each state typically requires vehicle owners to carry minimum levels of liability insurance coverage, although low penalties and ineffective enforcement potentially help millions of uninsured drivers to avoid any real consequences. If insurers offer greater limits of uninsured motorist (UM) coverage—and if states strengthen their auditing of uninsured drivers—this may help mitigate the risks that the UM cohort poses to fellow drivers.

Usage-based insurance, the most prevalent reason to install telematics on a motor vehicle, will have a significant impact on insurance.

Yet these approaches are not geared toward the realities facing individuals who opt out of insurance. That segment faces penalties and, in the worst scenario, potential financial ruin in the event of an accident. Consider this: If a single carrier enrolled all of these uninsured drivers tomorrow, it immediately would become the second-largest auto insurer in the United States. Why then do so many drivers remain uninsured, and how can insurers tailor UBI and other solutions to perhaps better meet their needs?

Cost barrier

Cost is among the leading concerns of drivers who don’t buy insurance. Premium rates are traditionally based on factors that include a policyholder’s geographic area and personal driving record. Individuals who garage and drive their vehicles in congested areas, therefore, may pay higher rates. Data suggests they are at greater risk for accidents that result in claims.

Limited ability to reliably measure a policyholder’s mileage has contributed to many insurers assuming a minimum annual level, such as 3,000 miles (approximately 10 miles per weekday), when determining premiums. Recently, insurers have received rave reviews for pay-per-mile UBI programs marketed toward millennials residing in metropolitan areas. Such programs use devices that plug into a vehicle’s onboard diagnostic ports to record miles driven. Policyholders are then billed per mile, allowing them to lower their insurance costs through reduced discretionary driving (for example, by carpooling or using public transportation).

A checkered record?

The second reason some drivers forgo insurance may be their lack of "insurability." Drivers who have had numerous accidents or violations, but have somehow retained their license, may not be viewed as sustainably insurable. Individuals with checkered histories may have limited options in the voluntary market and therefore be driven into the "residual" market.

Behavioral UBI may present opportunities for drivers to restore their insurability and gain access to the voluntary market. Some UBI programs have allowed policyholders essentially to purge accidents or violations by demonstrating responsible driving—for example, by no longer speeding. Many programs provide specific and detailed feedback to reportedly improve behaviors, basing their analysis on a policyholder’s driving data. Although there’s limited evidence that behavioral UBI has reduced the size of the residual market, many of its tools have the potential to advance this goal.

A third reason drivers may go uninsured is a state of mind known as the "invincibility complex." Nearly two-thirds of Americans reportedly consider themselves "excellent" or "very good" drivers, and up to 80 percent consider themselves to be "above average." Since they may perceive their accident risk to be low, some may elect to take their chances without insurance.

UBI can help separate fact from fiction. For example, an insurance telematics data exchange may use data collected by vehicles to provide policyholders with UBI discounts based on their driving style. Demonstrably safer drivers may qualify for deep savings and purchase coverage on those terms. Drivers with less than safe records may find their score pointing them to a need for greater protection and choose a non-UBI program or a behavioral UBI program that rewards improvement. Much like seeing their speed on a roadside sign persuading them to slow down, knowing their driving score may lead some drivers to purchase more insurance coverage.

Financial misconceptions regarding insurance are a fourth reason some may forgo coverage. Without an understanding of the concept of risk pooling, for example, some drivers might regard insurance simply as a one-sided transaction that takes from the policyholder, providing minimal prospects of a short-term return.

Even so, pay-per-mile and behavioral UBI may counter perceptions of one-sidedness, because costs increase with exposure and decrease with safer driving, as opposed to what often becomes a one-time handover of funds. Many UBI programs offer value-added services, including street-sweeping alerts, vehicle health reports, and rewards points. Those incentives can give policyholders additional savings, making an insurance transaction feel more multilateral even when a policyholder is fortunate enough to avoid a claim.

The world moves on

A final reason drivers may forego insurance is that standard policies have become less relevant to their needs. For example, most cars sit idle 90 percent or more of the time, according to one study. To help address this, automakers have explored new vehicle ownership agreements. In February 2016, Ford began testing shared car leasing to self-organized groups of three to six people.

Claims Journal described the question of whether insurance follows the driver or the vehicle, subject to variations in law, as a "MENSA brain teaser." Ford may have determined that current insurer underwriting guidelines may not address their shared car leasing program and found an insurer partner for the insurance component. While the ensuing policies currently don’t involve UBI, this model seems tailor-made for shared ownership. It can allocate insurance costs to operators of a vehicle based on the time, location, and relative riskiness of their driving. Some tests suggest that driving data collected through smartphones is 95 percent effective in differentiating driver versus passenger. So, while plug-in devices and vehicle connectivity have been choice technologies for UBI programs to date, smartphone-based UBI may be well suited to address the evolving coverage needs of policyholders.

UBI has been characterized in many ways—as an incentive for policyholders to switch carriers, a tool to drive retention, a loss control teacher, and an efficiency play with potential to span the entire policy life cycle. With all those possibilities, it’s easy to forget that roughly 10 percent of the insurable population opts out of the system. But with a more coherent and relevant insurance product, UBI may better equip insurers to grow their markets while serving the underserved.